Are you a conservative saver? Someone who would rather earn small steady gains rather than endure the higher risk – for the potentially higher reward – of the stock market? Or are you nearing retirement and more focused on preserving your savings rather than growing it?

Then these have been challenging market conditions for you – and with interest rates seemingly set to stay low until 2022, they may very well continue in the near-term and longer.

Low interest rates dampen bond returns

First, interest rates have been at record low levels for the better part of the last decade, which means that bond owners earn very little income from their investment, and cash in the bank earns little interest*. For example, if US Treasury bonds are yielding less than 1%, and you had $10,000 invested, you would earn less than $100 over the course of a year. As of this writing, interest rates are generally expected to remain exceptionally low until at least 2022, in an effort to help the economy recover from the shock of the Covid-19 pandemic, meaning it could be challenging to grow your savings in a low-risk way.

Inflation eats into savings

Next, inflation, or when prices rise, could make a challenging situation for conservative savers worse. As inflation rises, the US Federal Reserve (Fed) will usually raise interest rates to keep it in check. However, if the Fed keeps interest rates low – even if inflation starts to rise – in order to provide the economy with extra help to recover, prices of everyday goods and services – from food to doctor visits – could start to rise faster than your savings are growing.

High stock prices could increase volatility

Lastly, there is an ironic twist to interest rates staying low to help the economy recover: it can have the effect of boosting stock prices. Why can this happen? When investors can’t earn enough returns from bonds, they often buy stocks instead. But some investors can become concerned that a high demand for stocks will make them expensive, meaning there could be more downside risk until the economy really recovers.

* Unlike stocks and bonds, bank accounts are generally FDIC-insured up to $250,000 per depositor, per insured bank.

Upping your risk/reward potential

So, what’s a conservative saver to do? The first step is to understand that while interest rates remain low, you will not lose money with low-risk savings options, such as savings accounts at a bank but you are likely to earn extremely low interest rates. In addition, there is some risk that inflation could outpace your savings, meaning that your savings may not last you as long into retirement. That means you might have to consider factoring more equity investments into your asset allocation, even though there may be volatility and downside risk, because this may be the only potential for higher returns on your assets.

Therefore, it is important to carefully consider your situation in terms of how much you need to grow your assets, as well as how soon you need to start using them. If you still need to grow your retirement account to be comfortable in the future, you may want to consider keeping at least a small portion invested in equities, despite the near-term risk, especially if you still have at least five to 10 years before you need to start using this money.

If you have been investing conservatively because of your own risk tolerance, but you still have a long time before retirement, you also may want to consider increasing your allocation to equities. It may help you to know that despite the volatility, equities do tend to outperform bonds over time. Furthermore, some types of equity investments can be less volatile than others.

Even though the macro environment is challenging for low-risk savings strategies right now, there is an enormous range of options that you can choose from to try to find the optimal balance of risk and reward for your own personal situation.

This informational and educational discussion is not intended – and should not be relied upon – as investment or financial advice. Investing involves risk, including loss of principal invested, and you should carefully consider your own time horizon, goals, objectives and tolerance for risk before investing. Asset allocation does not guarantee a profit or protection against loss in a declining market. Past investment and market performance does not guarantee future results.